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Monday, October 4, 2010

Hyperoverbought - Really is that even a word?

There is an old saying on Wall Street that Bull Markets “Climb a wall of worry, and as Robert Precheter of Elliott Wave has coined they also, “slide a slope of hope. Lately, I have heard a nonstop chorus of calls for gold and it unloved brother silver to both decline in price heavily and that they are overbought. Dennis Gartman, who appears to me to have the ability to commit to any one investment for about 30 seconds at a clip, was the latest to proclaim that Gold is not only overbought but Hyperoverbought, coining yet another new term for the trading lexicon.  Reading and listening to the cacophony of voices screaming about gold and silver’s impending doom tells me that there is still more room to run to the upside. Yes, it is true that gold is more mainstream than when I first started buying bullion and the shares, but try bringing it up at a cocktail party and people’s eyes still glaze over. At the current point in time the “smart money” gets gold and silver while the public “sheeple” are a long way off from getting involved in the precious metals market.

Back to the plethora of overbought calls being shouted from the rooftops I am reminded of something I read years ago. As a student of the market, since just like being a doctor or laywer you need to keep learning , which is why they call it a “practice”; in fact I believe it should be a investment practice too as one can learn an astonishing amount about investing and still only have scratched the surface. So as part of my continual education I read many investment related books and articles, and certain things stick because they point out anomalies that have occurred. One needs to file away these anomalies to use as sign posts when one finds oneself in what could be called uncharted territory in the markets. The tidbit I am referring to can be found in a book, “How To Make Money In Stocks”, by William J. O’Neil of Investor’s Business Daily fame.

I had originally read this book in 1991 and found many useful items in it, but one in particular stood out to me. In fact in the year 2000 this observation from the book saved me from severe losses. There is section in the book (in my copy on page 66) titled “Overbought\Oversold :  Two Risky Words”, which discusses the short term overbought oversold indicator. In the couple paragraphs on the page Mr. O’Neil relates a story about  a well respected professional who heavily relied upon this type of indicator during the 1969 market break. The investment professional was stating that because his oversold indicator was very oversold that it was too late to sell, while Mr. O’neil was saying the opposite. In fact he goes on to say that the market split wide open after the index was really oversold and began a precipitous decline. Mr. O’neil points out that at the beginning of a bull or bear market the overbought oversold indicators can read extremes yet continue in the direction they were headed. The extreme readings like we see today in the precious metals are not uncommon in either bull or bear markets.

So will there be a correction in precious metals, possibly there will after all the price has run up fast and furious which is not exactly what you want to see, however it is not a definite. There is just as strong a possibility that the precious metals will consolidate the price gains by trading in a narrow range here supported by macro factors occurring around the world. It is possible for the precious metals to form a pattern know as a high tight flag near current levels and then use that formation to blast off again. The steep rise which seemed relentless looks like short covering to me. Given the conviction of the move it does appear as if the shorts got cleaned out at least for now. For the past couple decades going short precious metals was a very profitable trade, but everything changes and at least for the foreseeable future it does appear that the paradigm has changed and what used to work is no longer a sure bet.

As for the correction of course it could happen since nothing goes up in a straight line, but the demand side of the equation is strong for many reasons both economic and political in nature. The supply side of the equation is not expanding at a rate that would cause a glut. There are many arguments that there is lots of supply of precious metals above ground in the world, but it appears that there is more buying demand then selling demand. Higher prices will bring out selling, but how much higher is anyone’s guess.

Given the current situation with deficits and the debauchment of currencies, beggar they neighbor policies, general economic uncertainty and a loss of faith in governments in general I believe it will take substantially higher prices to convince people to part with what most in the world outside the US consider real money.  Moreover, any correction will be viewed as a buying opportunity and prices will snap back. It appears to me that there is support for the gold price at $1309.5, $1297 and very strong support at $1270, whether these levels get tested I have no idea, but I would look to pick up more bullion and shares there.  As for silver, gold’s much more spastic sibling, I can see support at $21.75, $21.45 and $20.85.

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1 comment:

mietwagen mallorca said...

I am doing research for my college paper, thanks for your useful points.

- Kris

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